Standard Essential Patent Landscape in India – Part 2

Following up on our earlier blog-post on Standard Essential Patents (here), in the second part we discuss the interplay between competition law and standard essential patents and further highlighting the issues related to SEP disclosure such as hold-ups and hold-outs ! 

Every entity, be it an individual or a company, has a right to own intellectual property. The idea of safeguarding an individual's intellectual property rights has been essential in accelerating the emergence of a scientific temperament in people. Protection through laws and enforcement only ensures that an invention or innovation is commercially exploited. Often a particular invention or innovation is so important that it really changes the world and sets a new standard, and all the rest flock to adopt the same. Certain patents become industry standards, requiring other companies to manufacture their products in accordance with the established guidelines. One can argue that a situation like this creates a monopoly in the market. This spirals into a dispute which often begs the question whether Standard Essential Patents (SEPs) are dominant in the market and whether such dominance leads to abuse? 

The need for Standardisation

Standardisation is a mechanism developed by standard setting organisations (SSOs) that allows for the creation of a patent portfolio that maintains standards and ensures compatibility. It is the process by which a group of patentees seek approval from SSOs as a package. Several SSOs issue SEPs incorporating various technologies. Several patents combined provide for a variety of activities, such as in the case of smartphones, where with each generation of technological advancement provides for more functions.  Moreover, negotiations for a licence are simplified because all patents are grouped together. Multiple licences are redundant and no longer necessary, as a single licence encompasses all patents in a set. 

SEPs and Competition Laws- A tug of war

It is often argued that SEPs grant the SEP owner a monopolistic right and thus in turn gives them dominance in the market. The competition laws of the country strictly bars abuse of dominance and this is quintessentially the infection point for both schools of thoughts, one being more inclined on believing that SEPs breed anticompetitive practices, while the other believes that SEPs when regulated with FRAND terms is beneficial for innovation.

Having canvased the larger debate above, it is still true that patents are only granted to new, original innovations, and patentees must demonstrate that their invention is not merely imitation or improvisation at best. There is no doubt that if an invention is new and novel, it would not naturally be a part an existing array of patents clubbed together under a kind of SEP. Thus, it is untrue that SEPs can have any effect on new and novel innovation. 

The entry of new firms with competing and often disruptive technology is the hallmark of technology-based markets. Taking the telecommunications sector as an example, where SEPs are very much relevant, it is a fact that this sector is highly susceptible to innovation, with ever expanding horizons of technological advancements. Actually, the presence of competitive constraints limits the ability of a SEP owner to charge exorbitant royalty fees, thereby naturally keeping a check on abuse of dominance. Moreover, dominance in this context, at best, is a transient phenomenon subject to the threatening presence of competitive constraints. If any, SEPs help in promoting competition, as a new player would not want to spend on royalties if it can own its original patent.

Finally, what really prevents big corporations owning SEPs from abusing their dominant position is perhaps the FRAND licensing conditions. For instance, FRAND is a voluntary agreement that ensures a licensee's technology is available to all firms who are willing to pay the license fee. Only a handful of companies actually have the capital pool to invest in R&D, whereas more companies use the technology so developed to make products. This precisely helps is greater proliferation of the new technology in the market. The smartphones market is an ideal testament to this where SEPs have accelerated the growth and dispersion of technology, however, with this it has also increased SEP related litigations. 

The Hold-up and the Hold-out issue

When a standard implementer invests in a business and later learns about the existence of a SEP, this is known as hold-up. The rights holder then demands astronomical royalties based on the technology's contribution, which the implementer is compelled to pay. The implementer faces the risk of not being able to utilise the investment it has already made because it has by then already incurred significant cost by investing in the business based on the standard. If the rights holder can threaten the implementer with an injunction on the grounds of patent infringement, the implementer is forced to comply with such demands. However, several experts do not believe in the reality of this issue[1] as on the contrary, standardisation has resulted in rapid decline of prices, especially in the smartphone sector. The logic behind such tends is simply that global market forces drive aggregate royalties to an appropriate level[2].

A situation known as "reverse hold-up" (or "hold-out") occurs when the implementer declines to negotiate a licence, and as a result the rights holder is unable to collect royalty income. In light of the limitations placed by courts on injunctions, many experts note that the issue of reverse hold-up by implementers has grown more serious in recent years than hold-up by SEP holders[3]. A penalty on such implementers who decline to participate in good faith licencing negotiations would be required to address these issues. Allowing the SEP holder to seek an injunction against these companies is one step. Several court decisions have held that injunctions against unwilling licensees are allowed.

The Delhi High Court has recently passed a decision affirming an interim injunction against Intex Technologies[4] and in effect has hit directly at strategies of holding-out. This came as a landmark decision, as it signifies India's turning point in the history of SEP litigation worldwide. This decision's interpretation is that it establishes guidelines after harmonising SEP cases from prestigious jurisdictions, but the final set of principles it upholds is special and tailored to the needs of Indian markets and litigation.

Conclusion

Some of the major practical challenges that IP experts, technical experts, SEP holders and licensees/implementors face in the domain of SEPs include over-declaration of SEPs, lack of standardised data and difficulty in determination of royalty rates[5]. Since, SEPs are typically self-declared, there remains a margin of error in over stating what actuals does one SEP covers. Again, as standards are often set by regional SSOs, getting a unified and complied data is not possible. A single international entity would perhaps solve this problem, but the dynamicity and sporadicity of the technological innovations prevent a consensus on a single international entity. 

From a technological standpoint, we are past the stage of CDMAs, 2G, 3G, etc, and the litigation we see now on these issues are remnants of the past, however, the laws and principles that have shaped up around this has paved the pavement to the future. The demand for SEPs in the field of AI-based apps has increased due to the growing applications of artificial intelligence (AI) and machine learning. Although a territory unchartered before, the learnings from the past will help iron out many wrinkles.

[1] Hoover IP2, Working paper series 16009, by Alexander Galetovic and Stephen H. Haber "The Fallacies of Patent Hold Up Theory". November 2016.

[2] Ankita Tyagi and Sheetal Chopra, ‘Standard Essential Patents (SEP’s)—Issues & Challenges in Developing Economies’ (2017) 22(3) Journal of Intellectual Property Rights 121.

[3] Sadao Nagaoka, Licensing of standard essential patents: Hold-up, reverse hold-up, and ex-ante negotiation, https://cepr.org/voxeu/columns/licensing-standard-essential-patents-hold-reverse-hold-and-ex-ante-negotiation#:~:text=Hold%2Dup%20is%20a%20situation,implementer%20is%20forced%20to%20comply.

[4] Intex Technologies v. Ericsson, FAO (OS) (COMM) 296/2018, Ericsson v. Intex Technologies, FAO (OS) (COMM) 297/2018

[5] https://www.inquartik.com/blog/basic-standard-essential-patents-the-bas…